THE FUTURE OF LOYALTY: DISRUPTIONS THAT WILL REVOLUTIONIZE THE INDUSTRY

BY JEREMY RABE

Aimia Inc. (TSX: AIM) is a loyalty and travel consolidator focused on growing earnings through its existing investments and the targeted deployment of capital in loyalty solutions and other sub-sectors of the rapidly expanding loyalty and travel markets.

Its investments in travel loyalty include the Club Premier program in Mexico, which it jointly controls with Aeromexico through its investment in PLM, and an investment alongside AirAsia in travel technology company BIGLIFE, the operator of BIG Loyalty.

Aimia also operates a loyalty solutions business, which is a globally-recognized leader in full-service loyalty solutions for many of the world’s leading retail, CPG, travel & hospitality, financial services and entertainment brands.

For more information about Aimia, visit corp.aimia.com.

For more information about Aimia Loyalty Solutions, including program strategy, design, analytics and campaigns, please visit www.aimia.com or email loyalty@aimia.com.

About Aimia

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Companies without strategic clarity on what the future will look like can be blindsided by change. For example, Blockbuster was likely not alarmed when Netflix first appeared on the scene. The Netflix value proposition didn’t hold much water against Blockbuster, whose customers were used to impulsively renting videos on the weekends and paying a few bucks for each video. Aided by emerging streaming technology and a proliferation of laptops and smartphones among consumers, Netflix re-invented their business model and took hold of new

customer segments. They focused on customers who were never a target of video rental chains before, nor were of high value to them, by promising to provide unlimited videos on demand to customers through a low-cost subscription

model. As we know, this broke up the video rental industry and changed the way we watched TV and movies. Netflix successfully combined new technology and a different business model to alter the video rental industry. And now, Netflix is at it again through the development of proprietary media content.

So, what disruptions will shape the future of the loyalty industry? They won’t be faddish technology like QR codes or blockchain that will be used in only a handful of applications, but game-changing trends that will shake loyalty to its core.

In 5 to 10 years, the loyalty industry will look very different than it does today due to massive disruption. Industries are always changing, so perhaps the prediction that ‘loyalty will be revolutionized’ won’t be a shock to many, but accurately identifying the drivers and timing of significant change tends to be much more elusive. Disruptions can come from a variety of different directions and trying to keep track of the trends from so many angles to effectively ‘see around the corner’ can be dizzying. Sometimes industry disruption comes from new enabling technology. Other times it comes from innovative business models. Occasionally it occurs as a result of a fundamental shift in the competitive landscape or industry value chain.

Companies without strategic clarity

on what the future will look like can be

blindsided by change.

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The past couple of decades have seen AI grow by leaps and bounds. Followers were amazed when Deep Blue (the IBM supercomputer) beat chess world champion Garry Kasparov in 1997. And while this was impressive, chess does have a limited rule set and options to play. That’s why it was significant that Google’s Alpha Zero not only taught itself how to play chess like a human, but it also conquered the more complex Chinese boardgame GO, much faster than experts had anticipated.

Five or ten years ago, companies started applying artificial intelligence to solve discreet business challenges. Google was one of the first players in this field, having statisticians build out models to predict the best search results for different types of searches, and then optimizing those results over time. In 2014, they decided to test how well their machine learning models could optimize this data. What they found was that, with the amount of data Google processes each second, not only was the machine-led process much more scalable, but it also produced better results than their most sophisticated human-developed models. Today, Google continues to push the boundaries of machine learning, even pushing its AI to be so human, actual humans may not realize they’re talking to machines1.

It’s not just the tech giants that are using machine learning. Now these tools and methods have become so readily available

that many companies that are not AI experts are implementing machine learning into their businesses, whether it’s figuring out the best temperature to cook food, optimizing supply chain or building marketing programs. I believe we’re still in the early stages of reaching the full potential of this technology, and that we’ll eventually move into a world where tasks we once considered only possible for

humans will be easily handled by machine learning; even highly creative processes like developing ad copy or recruiting talent for businesses.

Tasks historically performed by smart loyalty marketers such as analyzing customer data, determining breakage estimates and developing promotional

campaigns will be largely automated in the near future. Even though statistical models will be determining the marketing activity, if done properly, consumers will feel a personalized relationship with brands. Ultimately even highly complex and creative endeavors such as rewards management, points pricing and loyalty platform development will be performed using machine learning. The loyalty industry will shift away from gut feeling and experience - where marketing has historically played - to brute force computing and experimentation that will enhance loyalty program effectiveness forever.

TREND #1

ARTIFICIAL INTELLIGENCE (AI) AND MACHINE LEARNING

.. even pushing its AI to be so human,

actual humans may not realize they’re

talking to machines 1.

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Behavior Change: From the earliest iterations in the industry, such as Gold Bond Stamps started by Curt Carlson in 1938, loyalty programs were designed to try to create behavior change amongst customers. Whether the purpose was to increase spend, decrease attrition, acquire new customers or encourage more profitable consumer behavior, such as buying with cash rather than credit2 as in the case with the first-ever trading stamps, loyalty program incentives were effective tools to change customer behavior. Modern loyalty programs have grown more sophisticated in incentivizing other types of

profitable behavior, such as upsell, cross-sell, etc. However, even with this greater complexity of desired outcomes, loyalty programs still center on changing customer behavior - and that’s how brands can justify the expense of giving out rewards.

Data Collection: The second phase of loyalty occurred when brands weren’t sure if the behavior changes they were creating offset the investment.

For example, some of the bigger retailers that already had high market share were incurring high costs by rewarding customers who were already shopping with the brand. These costs were too great without the potential to win significant incremental business. While these large retailers couldn’t make a clear conclusion on ROI, they were able to see the massive amount of data their loyalty programs were generating and as a result, how valuable the insights were from a commercial intelligence perspective that they were able to glean from that data. For example, for a large grocer who may not be sure which products to stock on the aisle, with a loyalty program, they can leverage behavioral data to determine which products are purchased by their high-value customers as well as optimize a variety of other key commercial decisions such as merchandising, assortment, price and promotions. The value of the

loyalty program was more in the data collection and intelligence rather than the consumer behavior change.

Direct Communication: The next phase of loyalty programs started being pushed by companies who didn’t have a direct line of communication with their end customers as well as the companies that want to effectively personalize their customer experience. Building a direct line of communication is prevalent in industries like CPG/FMCG, who don’t own the immediate relationship with the consumer. As a result, the loyalty program became a vehicle to create that line of communication in a more efficient and effective way. With

TREND #2

THE CHANGING OBJECTIVES OF LOYALTY

.. encourage more profitable consumer

behavior, such as buying with cash

rather than credit 2

The reason companies seek out loyalty has changed – and continues to evolve.

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a loyalty program, companies can shift away from the traditional mass marketing and advertising channels, where ROI is difficult to measure, and move toward 1-to-1 connections that matter and show a strong return. In this scenario, the program’s value comes from brands spending strategically on their marketing directly to their target consumers rather than investing in costly mass messaging. For those companies seeking an efficient way to personalize, a robust loyalty platform coupled with advanced analytics and machine learning tools centralizes data and builds out a complete, holistic view of the customer that lends itself to individualized customer journeys.

Monetization: These three objectives remain important for loyalty programs, but perhaps the latest evolution in program objectives will prove to be one of the most significant. This

phase realizes the potential for a loyalty program to act as a product in and of itself and become a profit center rather than an expense item on the P&L. One of the most recognized examples of this is Amazon, where the revenues from paid

loyalty program memberships have driven significant profit to the bottom line in addition to creating behavior change. In the airline world, loyalty programs have turned into one of the largest profit pools and are highly valued by investors due to their stability, growth and low capex requirements. Thinking of the loyalty program

as a business line, in addition to a marketing program, creates a completely different mindset that opens new possibilities and a dramatic increase in budget to allocate toward realizing those possibilities. Much of the advancement in the industry has come and will continue to come from loyalty programs that generate real cash and hence have the financial wherewithal to invest in future innovation.

Not all objectives are equally important for all loyalty programs, but those programs that are able to maximize value across several or all of the four main objectives generally perform the best. And as the industry continues to move from just making investments in customer satisfaction to increase retention, to introducing multi-faceted strategies, including generating profit from the loyalty product itself, further disruption will occur.

.. move toward 1-to-1 connections

that matter and show a strong return

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The loyalty industry today is broadly structured in a way to deliver the main components of the loyalty program value chain, such as strategy, rewards, analytics, campaigns, creative, operations, platforms, etc. There is a lot of competition for providing these components of the value chain by in-house departments, established players within the loyalty industry and through increasing encroachment from companies outside the loyalty industry. For example, program management and creative services are being targeted by traditional advertising agencies or marketing firms, as we saw with Epsilon’s acquisition by Publicis3.

Analytics is another huge field where specialized analytics providers, whose sole purpose is innovating and executing best-in-class machine learning tools, are applying their techniques to loyalty. Because of this, loyalty firms currently offering machine learning are going to be pushed by better funded, more sophisticated, more focused AI companies. Rewards is another element of the value chain that has seen transformation over the years. Rewards has moved from the historical warehousing of goods and merchandise to more digital and virtual solutions enabled by different tech startups around the world. Rewards are also being targeted by payments companies, ecommerce players, telcos and even OTAs like Expedia, which has identified rewards programs as another source of getting additional volume into the Expedia ecosystem. Even in IT, traditional CRM providers

are adding functionality to offer loyalty solutions in addition to broader customer management.

Competition within the industry remains fierce. As many loyalty vendors fight for clients, pricing is under pressure and companies are managed with limited

cash on the balance sheet. In this highly fragmented and competitive environment, brands are not able to access products and services from bigger companies that have the scale to invest in much larger projects and develop breakthrough capabilities, features and functionalities. This environment is not sustainable, and the loyalty industry will follow the path of other marketing services sectors that have undergone consolidation to compete more effectively and provide more powerful capabilities to their clients. As this consolidation occurs, smaller firms will join forces with others or be forced to continue struggling alone.

TREND #3

LOYALTY INDUSTRY STRUCTURE

..the disruptions will ultimately have a

tremendous positive impact on the effectiveness..

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1 https://www.gearbrain.com/google-uses-artificial-intelligence-everywhere-2567302875.html2 https://www.democratandchronicle.com/story/news/local/rocroots/2015/07/31/whatever-happened-trading-stamps/30963275/3 https://adage.com/article/agency-news/publicis-groupe-acquires-epsilon-44-billion-deal/2164571

As we look to the future of the loyalty industry, machine learning technology, changing objectives of loyalty programs, and industry consolidation will be key drivers of disruption. These disruptions will occur alongside ever-increasing expectations from customers around personalization in their relationships with companies. While the industry may look very different than today, the disruptions will ultimately have a tremendous positive impact on the effectiveness of loyalty programs and will continue to drive loyalty program adoption and investment for years to come.

Jeremy Rabe joined Aimia as Chief Executive Officer in May 2018, responsible for driving the company’s business strategy and performance. His extensive loyalty industry experience includes six years at Premier Loyalty & Marketing, where he was a Board Director and the founding CEO responsible for the management of Club Premier, Mexico’s leading coalition loyalty program. Prior to joining Aimia, Jeremy was the Founder and Managing Partner of On Point Loyalty, a boutique investment and advisory firm focused on the

airline loyalty industry and an Operating Partner with Advent International, a leading global private equity firm. He has also worked as a strategy consultant and frequent flyer program director for Aeromexico and TACA Airlines.

Jeremy represents Aimia on the Boards of Premier Loyalty & Marketing and BIG Loyalty Sdn Bhd, the owner and operator of AirAsia BIG Loyalty, Jeremy has an MBA from INSEAD and graduated summa cum laude from Brigham Young University.

About Jeremy Rabe